Investors are taught, almost from the cradle, that they should seek to invest in monopoly rents.
Microsoft Corp (NASDAQ:MSFT) used to be one of those companies that had control of the market. A Control-of-market company, preferably a market without regulation, is said to be the key to big, so investors flock to companies like AT&T Inc (NYSE:T) and The Coca-Cola Co (NYSE:KO), which have such market control and have had it for decades.
Microsoft’s Windows was a monopoly for PC operating systems. Office was a monopoly in applications. Now it’s done, but the company, and its investors, are better off for it.
As a monopolist, Microsoft was filled with lawyers, PR people, and consultants whose job it was to say no. Under former CEO Steve Ballmer, the company was being strangled by such people. Now, under CEO Satya Nadella, the company is only in competitive markets, the naysayers are gone, and investors are better off.
Competition Helps
Competition, it turns out, keeps a company from going stale. It keeps it lean, and keeps management scared. Competition had made Microsoft a much better company.
Microsoft still has Windows but is losing share strength to Alphabet Inc (NASDAQ:GOOGL) Chromebooks on the desktop and has already lost to Apple Inc (NASDAQ:AAPL) and Android in mobile. Google Docs is taking big helpings of market share from Office. These divisions are still generating cash and profits, but they’re fighting to adapt.
The chief reason to own Microsoft stock today is its Azure cloud. Not just because it’s second in cloud infrastructure behind Amazon.com Inc (NASDAQ:AMZN) and its Amazon Web Services. It’s because of the applications the company is building on Azure, that its partners are building, and the new competitive attitude Nadella has fostered. Sign an alliance, become compatible. The old Microsoft would never have done this.
I have written about this before. Microsoft is what International Business Machines Inc. (NASDAQ:IBM) was 20 years ago under Lou Gerstner. It is a fully integrated cloud company able to monetize its cloud assets in many ways.
The not-invented-here syndrome is gone.
What Profits Flow to Microsoft
When Microsoft next reports earnings on October 19, analysts are expecting revenue of $24.04 billion, almost 20% more than a year ago, and net income of 79 cents per share, close to its June quarter. The seasonality that once defined its earnings pattern is gone. It should earn more than it did last Christmas, about 20% more than a year ago. Thus, 23 of 34 analysts following Microsoft now have it on their buy lists.
This “hybrid strength,” in Lucas Hahn’s words, make it what Tom Taulli calls a core holding with what Richard Saintvilus calls “room to run.”
Skeptics are concerned about the short term. InvestorPlace contributor Laura Hoy says you should be able to get it for less in a weakening market, and I agree. Our Joseph Hargett also is concerned about its technicals and that makes sense.
If you have a three- to five-year investment-time horizon, as I do, you don’t worry about relative price. You see across the weakness; you buy and you hold. I have done this recently with stocks like Alibaba Group Holding Ltd (NASDSAQ:BABA) and Facebook Inc (NASDAQ:FB) and won solid profits.
The Bottom Line on MSFT
Time is on your side with Microsoft. It’s not a monopolist, it’s in big markets like artificial intelligence and blockchain that are just starting to grow. It is defining enterprise computing, ready to make alliances and forego proprietary advantage in favor of its customers’ interests.
That’s the kind of company I want my money in. Microsoft is no longer throwing away its shot.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA, MSFT and AMZN.
